Back-To-School Sales Show Consumers Are Still Spending

The disappointing jobs report is stoking fears that another recession may be inevitable, but it is worth considering that there has been some encouraging signs from the retail sector.

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If this back-to-school shopping season has taught us anything, it is that if you look at the difference between what consumers are saying and what they are doing, the outlook for consumer spending gets a bit brighter.

The back-to-school season, which extends from July through September, is the second busiest shopping period after Christmas, and many people—rightly or wrongly—look to it to help project how spending will shape up during the upcoming Christmas holiday season.

It is also important for the economy. Consumer spending makes up about 70 percent of the economy, and retail spending is the biggest chuck—or a bit more than 40 percent of all spending.

What is the back-to-school period telling us?

1. Consumers Aren't Off Rails

Consumers have had to endure high unemployment, the debt debate in Washington, volatility on Wall Street, and for those in the Eastern U.S., the wrath of Hurricane Irene, which shuttered stores from North Carolina through New England during the last weekend of August. But if you look at retail sales, Americans are showing resilience.

"Even taken together, these factors have not been able to derail the U.S. consumer," said Michael McNamara, senior vice president of research and analysis at MasterCard Advisors.

The Thomson Reuters Same-Store Sales Index rose 4.4 percent in August. Although that number fell short of its 4.6 percent estimate on Thursday, it is a healthy number. The index tracks 23 retailers who have reported monthly sales for August, and it only looks at sales at stores open at least 12 months.

Sales are equally encouraging when you look at a broader swath of retail spending captured by MasterCard Advisors SpendingPulse. For the July-August time period, the macroeconomice report showed an increase of 3 percent from the prior year.

The 3.0 percent gain is the largest year-over-year increase since 2006 when sales increased by 6.2 percent.

Customer Growth Partners, which measures total sales based on company reports and the research firm own proprietary store data and research, said July to August sales rose 6.4 percent, which is the best growth since before the recession.

"Despite being buffeted by the winds of inflation, Irene, and unemployment this back-to-school season is shaping up as the best in years," said Craig Johnson, president of Consumer Growth Partners.

2. Consumers Paying Higher Prices

What's more, consumers are doing this in the face of higher prices. Heading into the back-to-school shopping season, cotton prices had climbed and there was a lot of concern that consumers would balk at paying higher prices for clothing. But they are.

"Although consumer confidence weakened markedly in August, the consumer manned up and bought what was needed to be bought for back to school," said Brian Sozzi, a retail industry analyst at Wall Street Strategies.

Ever since the July consumer credit report, there has been evidence that Americans are using their credit cards more. This is a sign that consumers are more confident than they might be letting on in recent consumer confidence surveys, according to Sozzi.

"So in spite of how consumers are pouring out their feelings to the good folks at the Conference Board and Michigan, they have managed to grin and bear price increases, which is very important to getting comfortable around placing bets on specific stocks prior to the holidays," Sozzi said.

3. Luxury Still Chugging Along

The wild gyrations of the stock market in August sparked some fear that the luxury consumer might rein in spending as high-end consumer spending tends to rise and fall with the stock market. But he luxury consumer kept buying.

High-end department stores JW Nordstrom and Saks both reported solid same-store sales gains. (Although Saks fell slightly short of estimates, it was partially due to lost sales during Hurricane Irene.)

4. Irene's Impact Will Linger

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Jim Abel shops for hurricane supplies at Home Depot as he prepares for the possible arrival of Hurricane Irene on August 22, 2011 in West Palm Beach, Florida.

The impact of Hurricane Irene is not going away either. A portion of the disruption was felt in August, but some retailers also will be dealing with the storm into September.

But if August's pattern holds, it seems many retailers will be able to offset the storm's drag on sales with stronger performance in other parts of the country.

It's also surprising that despite the mad rush to the stores to stock up on supplies to weather the storm, none of the retailers reporting sales on Thursday said the hurricane helped their results.

5. Mom Could Be Pulling Back

One troubling sign is that mom may be spending less on herself to help sustain the household. Sozzi cited weaker-than-expected sales at Cato , a moderate-priced apparel chain that reported a 3.0 percent sales decline in August, as an example.

He also said sales trends at Ann , which doesn't report monthly sales results, have shifted from the second quarter compared with the first quarter.

Since women tend to pull back on spending first, it is a point to watch as it may be an indication of more trouble ahead. There are plenty of observers who are a bit more cautious about the outlook for spending.

Frank Badillo, senior economist at Kantar Retail, said that the impact of unavoidable back-to-school spending and the need to purchase supplies for Hurricane Irene are masking attempts by shoppers to curb their spending.

Badillo expects same-store sales to weaken in the coming months. He bases this on responses to Kantar's Shoper Scape survey, which showed a higher percentage of shoppers saying they plan to spend less in the coming months. That may be because consumers are also feeling a little worse about their own financial health. Job security was the only measure where shoppers' perception of their financial well-being showed any improvement in August.

But even against this backdrop, there is a reason to be encouaraged. Kantar's early read of holiday spending is showing more shoppers are planning to spend more this holiday season than last year.